1. MANILA WINE MERCHANTS INC.
v CIR ● Immediacy Test: Construed the words “reasonable needs of the business” to mean
L-26145
FEBRUARY 20, 1984
TS
Topic: IMPROPERLY ACCUMULATED EARNINGS TAX
Petitioners: THE MANILA WINE MERCHANTS, INC.,
Respondents: CIR
Ponente: GUERRERO, J.
FACTS:
● Manila Wine is a domestic corporation principally engaged in the importation and
sale of whisky, wines, liquors and distilled spirits.
● Its original subscribed and paid capital was P500K, reduced to P250K then
increased to P1M.
● CiR examined Manila Wine’s book of account and found unreasonably accumulated
surplus of P428,934.32 for the calendar year 1947-1957, in excess of the
reasonable needs of the business subject to the 25% surtax imposed by Section 25
of the Tax Code.
● CIR demanded of P126,536.12 as 25% surtax and interest on Manila Wine’s
unreasonable accumulation of profits and surplus for 1957.
● CIR contends that Manila Wine has accumulated earnings beyond the reasonable
needs of its business because the average ratio of the cash dividends declared and
paid from 1947-1957 was 40.33% of the total surplus available for distribution at
the end of each calendar year.
● Another basis in assessing Manila Wine for accumulated earnings tax is its
substantial investment of surplus or profits in unrelated business.
ISSUE: W/N U.S.A. Treasury bonds by Manila Wine in 1951 can be construed as an
investment to an unrelated business and was availed of for the purpose of preventing the
imposition of the surtax upon Manila Wine’s shareholders by permitting its earnings and
profits to accumulate beyond the reasonable needs of the business. – YES.
RULING:
● A prerequisite to the imposition of the surtax has been that:
o 1. The corp be formed or availed of for the purpose of avoiding the
income tax (or surtax) on its shareholders, or 2. on the shareholders of
any other corporation by permitting the earnings and profits of the
corporation to accumulate instead of dividing them among or distributing
them to the shareholders.
● If the earnings and profits were distributed, the shareholders would be required to
pay an income tax. On the other hand, if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and profits of the
corporation. The touchstone of liability is the purpose behind the accumulation of
the income and not the consequences of the accumulation. Thus, if the failure to
pay dividends is due to some other cause, such as the use of undistributed earnings
and the scope of the statute.
● To avoid the 25% surtax, Manila Wine has to prove that the purchase of the U.S.A.
Treasury Bonds in 1951 with a face value of $175K was an investment within the
reasonable needs of the corp.
the immediate needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the accumulation of the earnings
and profits, the accumulation was not for the reasonable needs of the business,
and the penalty tax would apply.
● The records further reveal that from May 1951 when Manila Wine purchased the
U.S.A. Treasury shares, until 1962 when it finally liquidated the same, it never had
the occasion to use the said shares in aiding or financing its importation. This
militates against the purpose enunciated earlier that the shares were purchased to
finance its importation business.
o To justify an accumulation of earnings and profits for the reasonably
anticipated future needs, such accumulation must be used within a
reasonable time after the close of the taxable year.
● In order to determine whether profits are accumulated for the reasonable needs of
the business as to avoid the surtax upon shareholders, the controlling intention of
the taxpayer is that which is manifested at the time of accumulation not
subsequently declared intentions which are merely the product of afterthought.
● A speculative and indefinite purpose will not suffice. The mere recognition of a
future problem and the discussion of possible and alternative solutions is not
sufficient. Definiteness of plan coupled with action taken towards its
consummation are essential.
DISPOSITIVE PORTION:
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of
Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is
hereby rendered relieving petitioners of the corporate income tax liability in this case,
without pronouncement as to costs.
2: CIR v Tuazon / GR. NO. 85749 / May 15, 1989
BY: MIKKI
TOPIC: Improperly Accumulated Earnings Tax
PETITIONERS: Commissioner of Internal Revenue
RESPONDENTS: Antonio Tuazon Inc.
PONENTE: J. Grino-Aquino
- In Feb. 1981, CIR assessed Antonio Tuazon Inc. the ff:
a. Deficiency Income Tax for years 1975, 1976 and 1978 – P37,491
b. Deficiency Corporate Quarterly Income Tax for the first quarter of 1975 –
161.49
c. 25% surtax on unreasonable accumulation of surplus for the years 1975-1978
– P1,151,146 (based on Sec. 25 of the NIRC)
- Respondent did not object and paid the first two assessments, but protested the
third item
● Respondent contended that the accumulation of surplus profits during the
years in question was solely for the purpose of expanding its business
operations as a real estate broker
 ● CIR did not act upon the said protest. Instead, it issued warrants of distraint
and levy, in order to enforce collection of the amount assessed (including
those already paid under the first 2 items)
- Tuazon Inc. went to the CTA
● CTA issued a writ of injunction against CIR, ordering petitioner to refrain from
enforcing the said warrants
● CTA: the right asserted by CIR to enforce the warrants was not clear, and it
was shown that Tuazon already paid a portion of the tax assessed
- CIR is before the Court to appeal the CTA decision
● CIR’s contention: When the corporation accumulated a “surplus” of P3.2 M
(which could have been distributed to its shareholders) from its earnings in
1975-1978, the purpose of the said surplus was to avoid the imposition of
progressive income tax on its shareholders
● Tuason Inc (respondent): these surplus profits were set aside to build capital
for its expansion program
ISSUE: W/N petitioner Tuazon Inc. is liable for the 25% surtax on undue accumulation of
surplus for the years 1975-1978
HELD: Yes
- CTA (relying on CIR’s determination) correctly determined that Tuason Inc. is a
holding or investment company
● The corporation was not involved in the development of subdivisions; it
merely subdivided its own lots and sold them for bigger profits
🡪 Respondent derived its income from interests, dividends and rentals from the sale of
real property
🡪 99.99% of the company stock is owned by Antonio Tuason himself.
- The fact that Antonio Tuason Inc (respondent) accumulated surplus profits
amounting to P 3.2 million was not in question
● BUT the CIR correctly pointed out that these surplus profts were never used
● There was an enormous discrepancy between the declared market value (P
420k for an apartment bldg., P290k for a condo) and the investment cost
alleged by respondent (P1.7m for the aforementioned apartment, P1.5m for
the condo)
- Basically, at the time of the assessment in 1981, respondent only invested P700k of
the P3.2million surplus
● Which leaves about P2.4million as the amount subject to the 25% surtax (refer
to item c. in first bullet)
3. Cyanamid Philippines Inc v CA
GR NO. 108067
January 20,2000
Topic: Improperly Accumulated Earnings Tax
Petitioners: Cyanamid PH
Respondents: CIR
Ponente: Quisimbing
FACTS:
● Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is
a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA.
● It is engaged in the manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an importer/indenter.
● February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the
payment of deficiency income tax of P119,817 for taxable year 1981 which the
petitioner on March 4, 1985, protested particularly;
o (1) 25% surtax assessment of P3,774,867.50;
o (2) 1981 deficiency income tax assessment of P119,817;
o (3) 1981 deficiency percentage assessment of P3,346.72.
▪ CIR refused to allow the cancellation of the assessment notices.
● During the pendency of the case on appeal to the CTA, both parties agreed to
compromise the 1981 deficiency income assessment of P119,817 and reduced to
P26,577 as compromise settlement.
● But the surtax on improperly accumulated profits remained unresolved.
● Petitioner claimed that the assessment representing the 25% surtax had no legal basis
for the following reasons:
o (a) petitioner accumulated its earnings and profits for reasonable
business requirements to meet working capital needs and retirement of
indebtedness,
o (b) petitioner is wholly owned subsidiary of American Cyanamid Co., a
corporation organized under the laws of the State of Maine, in the USA, whose
shares of stock are listed and traded in New York Stock Exchange.
▪ This being the case, no individual shareholder of petitioner could
have evaded or prevented the imposition of individual income taxes
by petitioner’s accumulation of earnings and profits, instead
contribution of the same.
● CTA denied said petition.
ISSUE:
● Whether petitioner is liable for the accumulated earnings tax for the year 1981. – YES
HELD/RATIO:
● The provision (Section 25 of Internal Revenue Code of 1977) discouraged tax avoidance
through corporate surplus accumulation. When corporations do not declare dividends,
income taxes are not paid on the undeclared dividends received by the shareholders.
● The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earnings by shareholders
could, in turn, be taxed.
● The amendatory provision of Sec. 25 of the 1977 NIRC, which was PD1739, enumerated
the corporations exempt from the imposition of improperly accumulated tax:
o (a) banks,
 o (b) non-bank financial intermediaries;
o (c) insurance companies; and
o (d) corporations organized primarily and authorized by the Central Bank to
hold shares of stocks of banks.
● Petitioner does not fall among those exempt classes. Besides, the laws
granting exemption form tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power.
● Taxation is the rule and exemption is the exception.
● The burden of proof rests upon the party claiming the exemption to prove that it is, in
fact, covered by theexemption so claimed; a burden which petitioner here has failed to
discharge.
● Unless rebutted, all presumptions generally are indulged in favor of the correctness of
the CIR’s assessment against the taxpayer.
● With petitioner’s failure to prove the CIR incorrect, clearly and conclusively, this court is
constrained to uphold the correctness of tax court is ruling as affirmed by the CA.
● In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon the shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts.
● The accumulated profits must be used within reasonable time after the close of the
taxable year.
● In the instant case, petitioner did not establish by clear and convincing evidence that
such accumulated was for the immediate needs of the business.
● To determine the reasonable needs of the business, the United States Courts have
invented the “Immediacy Test” which construed the words “reasonable needs of the
business” to mean the immediate needs of the business, and it is held that if the
corporation did not prove an immediate need for the accumulation of earnings and
profits such was not for reasonable needs of the business and the penalty tax would
apply. (Law of Federal Income Taxation Vol 7)
● The working capital needs of a business depend on the nature of the business, its credit
policies, the amount of inventories, the rate of turnover, the amount of accounts
receivable, the collection rate, the availability of credit and other similar factors.
● The Tax Court opted to determine the working capital sufficiency by using the ration
between the current assets to current liabilities. Unless, rebutted, the presumption is
that the assessment is correct. With the petitioner’s failure to prove the CIR incorrect,
clearly and conclusively, the Tax Court’s ruling is upheld.
4. ABRA VALLEY COLLEGE, INC vs. HON. JUAN P. AQUINO
G.R. No. L-39086
June 15, 1988
By: Kit
TOPIC: Tax exemptions
PETITIONERS: ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA
RESPONDENTS: HON. JUAN P. AQUINO
PONENTE: PARAS, J.
FACTS:
· Petitioner, an educational corporation and institution of higher learning duly
incorporated with the Securities and Exchange Commission in 1948
o It filed a complaint to annul and declare void the “Notice of
Seizure’ and the “Notice of Sale” of its lot and building located at Bangued, Abra,
for non-payment of real estate taxes and penalties amounting to P5,140.31.
o Said “Notice of Seizure” by respondents Municipal Treasurer
and Provincial Treasurer, defendants below, was issued for the satisfaction of the
said taxes thereon.
· The parties entered into a stipulation of facts adopted and embodied by the trial court
in its questioned decision. The trial court ruled for the government, holding that the second
floor of the building is being used by the director for residential purposes and that the
ground floor used and rented by Northern Marketing Corporation, a commercial
establishment, and thus the property is not being used exclusively for educational purposes.
· Instead of perfecting an appeal, petitioner availed of the instant petition for review on
certiorari with prayer for preliminary injunction before the Supreme Court, by filing said
petition on 17 August 1974.
ISSUE:
Whether or not the lot and building in question are used exclusively for educational purposes
and thus exempted from paying taxes.
HELD:
· The 1935 Philippine Constitution, Art. VI, par. 3 Sec. 22, expressly grants exemption
from realty taxes for “Cemeteries, churches and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious, charitable
or educational purposes….
· Relative thereto, CA No. 470 as amended by RA No. 409, Sec. 54, paragraph c otherwise
known as the Assessment Law, provides:
o The following are exempted from real property tax under the
Assessment Law:
(c) churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, scientific or
educational purposes.
· Thus, the use of the second floor of the main building for residential purposes of the
Director and his family, may find justification under the concept of incidental use, which is
complimentary to the main or primary purpose–educational.
· The lease of the first floor, however, by a commercial establishment cannot be
considered incidental to the purpose of education.
· Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the
school building as well as the lot where it is built, should be taxed, not because the second
floor of the same is being used by the Director and his family for residential purposes, but
because the first floor thereof is being used for commercial purposes.
CASE NO. 5: CIR v CTA, CA and YMCA Inc / GR. NO. 85749 / Oct. 14, 1988
BY: MIKKI
TOPIC: Tax-Exempt Corporations and Corporations Taxed at Preferential Rates
PETITIONERS: Commissioner of Internal Revenue
RESPONDENTS: CTA, CA and YMCA Inc
PONENTE: J. Panganiban

- Respondent YMCA is a non-stock, non-profit institution which conducts various
programs and activities that are beneficial to the public, particularly to the youth
● In 1980, YMCA Inc. earned the ff:
a. P670k from leasing out a portion of its premises (to restaurants and
canteens)
b. P44k from parking fees collected from non-members
- On July 1984, CIR assessed YMCA for deficiency income tax, deficiency expanded
withholding taxes on rentals and on wages, amounting to P415k (based on Sec. 27
of the Tax Code)
● YMCA filed a protest with the CIR, but was denied by the petitioner
- Respondent YMCA went to the CTA; CTA ruled in favor of respondent
● CTA reasoned that:
🡪 the leasing of the premises are reasonably incidental and reasonably necessary for the
accomplishment of the objectives of YMCA
🡪 the premises were leased to members, and they have to service the needs of their
members and guests
🡪 rentals were minimal; and the rentals and the parking fees combined were just
enough to cover the cost of operation and maintenance
- CIR elevated the case to the CA
● CA ruled in favor of CIR, but on appeal, reversed its earlier ruling and decided
in favor of YMCA
- CIR went to the Supreme Court
● CIR’s contention: Exemption in Sec. 27 of NIRC does not apply to income
derived from any of their (those exempted) properties, real or personal, OR
from any activities conducted for profit (regardless of disposition)
● YMCA’s contention: last paragraph of Sec. 27 should be subject to the
qualification that the income from the properties must arise from the
activities conducted for profit before it is considered taxable
ISSUE: W/N the income derived from rentals of real property owned by the YMCA subject to
income tax
HELD: Yes
- Court cited Sec. 27 of the Tax Code:
Sec. 27 Exemptions from tax on corporations – The ff. shall not be taxed under this
title:
(g) civic league or organizations not organized for profit but operated exclusively for
the promotion of social welfare
(h) club organized and operated exclusively for pleasure, recreation and other non-
profitable purposes, no part of which inures to the benefit of any private
stockholder or member.
- The exemption claimed by YMCA is expressly disallowed by the last paragraph of
Sec. 27
● Which provides that the income of exempt organizations (such as YMCA) from
any of their properties, real or personal, must be subject to tax imposed by the
Tax Code
- The language of the law is clear and ambiguous and its express terms must be
applied
6.) Ateneo De Manila University v. CIR
Case No. 7246 and 7293
March 11, 2010
By: Kit
TOPIC: Tax Exemptions
PETITIONERS: Ateneo De Manila University
RESPONDENTS: CIR
PONENTE: Casanova, J.
FACTS:
· On 15 July 2004, Petitioner received Respondent's assessment dated 13 July 2004, with
attached Details of Discrepancies for Petitioner's alleged deficiency income tax for the fiscal
year ending 31 March 2001 in the aggregate amount of P2,334,211.22.
· Respondent argues that:
o a) Petitioner's four (4) cafeterias are not operated by
petitioner, but by different concessionaires;
o b) Section 2.2 of DOF Circular 137-87 and BIR Ruling 173-88
provide that revenues derived from assets used in the operation of canteens,
dormitories, hospitals, and bookstores are exempt from taxation, provided they are
owned and operated by the educational institution as ancillary activities and the
same are located within the school premises; and
o c) Petitioner's Income Tax Return and Financial Statements do not
show the details of expenses from its cafeteria operations
ISSUE:
Whether or not ADMU’s revenues are exempt from taxation, regardless of their source, as
long as the revenues are actually, directly, and exclusively used for educational purposes
HELD:
YES,
· There are two requirements that the educational institution must prove to avail of tax
relief
o 1.) It falls under the classification non-stock, non-profit educational
institution; and
o 2.) The income it seeks to be exempted from taxation is used actually,
directly, and exclusively for educational purposes
· The first requirement is met as both parties acknowledge the fact that ADMU is indeed
a non-stock, non-profit educational institution
· As to the second requirement; Petitioner’s witness, Mr. Jose Salvador, testified that
the canteen, albeit not fully owned by ADMU, is used as a medium for teaching preparatory
and grade school students for classroom lessons and practical applications of topics
· Another witness, Ms. Wijancho, testified that the income generated by the cafeterias is
commingled with the other funds that make up “other educational income” and is made
available for school operations such as:
o salaries
o employee benefits
o faculty development
o supplies and expenses
o new books
o scholarships
o research
o new equipment
o major improvements
· Further, ADMU submitted Income Summaries and Summaries of Contribution and
Expenditure to show that the concession fees were actually, directly, and exclusively used for
educational purposes; validating its compliance with the second requirement for tax relief
7.) CIR vs. DLSU
GR NO. 196596, 198841, 198941
November 9, 2016
By: Martin
FACTS
· Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's books
of accounts and other accounting records for all internal revenue taxes for the period
Fiscal Year Ending 2003 and Unverified Prior Years.
· Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand
assessed DLSU the following deficiency taxes: (1) income tax on rental earnings from
restaurants/canteens and bookstores operating within the campus; (2) value-added tax
(VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease
contracts. The BIR demanded the payment of P17,303,001.12, inclusive of surcharge,
interest and penalty for taxable years 2001, 2002 and 2003.
· DLSU protested the assessment. The Commissioner failed to act on the protest;
thus, DLSU filed on August 3, 2005 a petition for review with the CTA Division.
· the CTA Division partially granted DLSU's petition for review.
· the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing
that DLSU's use of its revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the Constitution.
· the CTA Division, in view of the supplemental evidence submitted, reduced the
amount of DLSU's tax deficiencies amounting to 5,506, 456.71
· These petitions were consolidated and brought to the Supreme Court.
· The Commissioner submits the following arguments: DLSU's rental income is
taxable regardless of how such income is derived, used or disposed of. DLSU's
operations of canteens and bookstores within its campus even though exclusively
serving the university community do not negate income tax liability. Article XIV,
Section 4 (3) of the Constitution and Section 30 (H) of the Tax Code “the income of
whatever kind and character of a non-stock and non-profit educational institution
from any of its properties, real or personal, or from any of its]activities conducted for
profit regardless of the disposition made of such income, shall be subject to tax
imposed by this Code.”
· The Commissioner posits that a tax-exempt organization like DLSU is exempt only
from property tax but not from income tax on the rentals earned from property. Thus,
DLSU's income from the leases of its real properties is not exempt from taxation even if
the income would be used for educational purposes.
· DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all
assets and revenues of non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes are exempt from taxes and duties.
· DLSU elaborates that the tax exemption granted to a private educational
institution under the 1973 Constitution was only for real property tax. Back then, the
special tax treatment on income of private educational institutions only emanates
from statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that
exemption from tax of all the assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined
· DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and
effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of
whatever kind and character of a non-stock and non-profit educational institution from
any of its properties, real or personal, or from any of its activities conducted for profit
regardless of the disposition made of such income, should be declared without force and
effect in view of the constitutionally granted tax exemption on "all revenues and assets
of non-stock, non-profit educational institutions used actually, directly, and exclusively
for educational purposes.
·
ISSUE
Whether DLSU's income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes.
HELD/RATIO
YES
· The requisites for availing the tax exemption under Article XIV, Section 4 (3),
namely: (1) the taxpayer falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually,
directly and exclusively for educational purposes.
· A plain reading of the Constitution would show that Article XIV, Section 4 (3) does
not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational institution.
· The phrase all revenues is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly and exclusively
for educational purposes, then said revenues and income shall be exempt from taxes
and duties.
· Thus, when a non-stock, non-profit(NSNP) educational institution proves that it
uses its revenues actually, directly, and exclusively for educational purposes, it shall
be exempted from income tax, VAT, and LBT.
· On the other hand, when it also shows that it uses its assets in the form of real
property for educational purposes, it shall be exempted from Real Property Tax.
 · The last paragraph of Section 30, Tax Code is without force and effect with respect
to non-stock, non-profit educational institutions, provided, that the NSNP educational
institutions prove that its assets and revenues are used actually, directly and exclusively
for educational purposes
· The tax exemption granted by the Constitution to NSNP educational institutions is
conditioned only on the actual, direct and exclusive use of their assets, revenues and
income for educational purposes
· This demonstrates the policy of the Constitution to provide broader tax privilege to
NSNP educational institutions as recognition of their role in assisting the State provide a
public good
· The tax exemption was seen as beneficial to students who may otherwise be
charged unreasonable tuition fees if not for the tax exemption extended to all revenues
and assets of non-stock, non- profit educational institutions
· We make this declaration in the exercise of and consistent with our duty to uphold
the primacy of the Constitution. We stress that our holding here pertains only to non-
stock, non-profit educational institutions and does not cover the other exempt
organizations under Section 30 of the Tax Code. For all these reasons, we hold that the
income and revenues of DLSU proven to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes.
8. CIR v. ST. LUKES
GR NOS. 195909 and 195960
SEPTEMBER 26, 2012
KCTR
Topic: TAX-EXEMPT CORPORATIONS AND CORPORATIONS TAXED AT PREFERENTIAL RATES 
 o deficiency income tax of P5,496,963.54 arose from the failure of St.
Petitioner COMMISSIONER OF INTERNAL REVENUE
Respondent: ST. LUKE'S MEDICAL CENTER, INC.
Ponente: CARPIO, J.
DOCTRINE: The effect of the introduction of Section 27 (B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit educational institutions and
proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10%
preferential rate under Section 27 (B) instead of the ordinary 30% corporate rate under the
last paragraph of Section 30 in relation to Section 27 (A) (1).
FACTS:
● St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and
non- profit corporation.
● Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting to
P63,935,351.57 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax.
● BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC.
● Thus, St. Luke's appealed to the CTA.
● BIR argued before the CTA that Section 27 (B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's.
o According to the BIR, Section 27 (B), introduced in 1997, "is a new
provision intended to amend the exemption on non-profit hospitals that
were previously categorized as non-stock, non-profit corporations under
Section 26 of the 1997 Tax Code . . . ."
o It is a specific provision which prevails over the general exemption on
income tax granted under Section 30 (E) and (G) for non-stock, non-profit
charitable institutions and civic organizations promoting social welfare.
o BIR claimed that St. Luke's was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes.
Moreover, the hospital's board of trustees, officers and employees
directly benefit from its profits and assets.
● St. Luke's maintained that it is a non-stock and non-profit institution for charitable
and social welfare purposes under Section 30 (E) and (G) of the NIRC. It argued that
the making of profit per se does not destroy its income tax exemption.
o St. Luke's contended that the BIR should not consider its total revenues,
because its free services to patients was P218,187,498 or 65.20% of its
1998 operating income of P334,642,615.
o St. Luke's also claimed that its income does not inure to the benefit of
any individual.
● CTA ORDERED St. Lukes to PAY deficiency income tax and deficiency expanded
withholding tax for the taxable year 1998 in the respective amounts of
P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38,
o The CTA stated, "it is clear that non-stock, non-profit hospitals operated
exclusively for charitable purpose are exempt from income tax on income
received by them as such, applying the provision of Section 30 (E) of the
NIRC of 1997
Luke's to prove that part of its income in 1998 came from charitable
activitiesDHE
o The CTA held that Section 27 (B) of the present NIRC does not apply to St.
Luke's. To apply the 10% preferential rate, Section 27 (B) requires a
hospital to be "non-profit."
ISSUE:
W/N St. Luke's is liable for deficiency income tax in 1998 under Section 27 (B) of the NIRC,
which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals – YES.
RULING:
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. Section 30 (E) and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely exempt from income
tax. An institution under Section 30 (E) or (G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate
rate but now at the preferential 10% rate pursuant to Section 27 (B). DaTEIc
● We hold that Section 27 (B) of the NIRC does not remove the income tax exemption
of proprietary non-profit hospitals under Section 30 (E) and (G).
● The effect of the introduction of Section 27 (B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit educational institutions
and proprietary non-profit hospitals, among the institutions covered by Section 30,
to the 10% preferential rate under Section 27 (B) instead of the ordinary 30%
corporate rate under the last paragraph of Section 30 in relation to Section 27 (A)
(1).
o "Proprietary" means private
o "Non- profit" means no net income or asset accrues to or benefits any
member or specific person
● To be exempt from income taxes, Section 30 (E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable
purposes.
o St. Luke's fails to meet the requirements under Section 30 (E) and (G) of
the NIRC to be completely tax exempt from all its income.
o In 1998, St. Luke's had total revenues of P1,730,367,965 from services to
paying patients. It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is not an institution
"operated exclusively" for charitable purposes. Clearly, revenues from
paying patients are income received from "activities conducted for
profit."
● However, it remains a proprietary non-profit hospital under Section 27 (B) of the
NIRC as long as it does not distribute any of its profits to its members and such
profits are reinvested pursuant to its corporate purposes.
o St. Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.
DISPOSITIVE PORTION:
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is
PARTLY GRANTED . The Decision of the Court of Tax Appeals En Banc dated 19 November
2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's
Medical Center, Inc. is ORDERED TO PAY the de ciency income tax in 1998 based on the 10%
preferential income tax rate under Section 27 (B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such de ciency income tax under
Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision
and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating
Section 1, Rule 45 of the Rules of Court.
9. PAGCOR v. BIR
G.R. No. 172087
DATE: Mar. 15, 2011
By: EAY3
Topic: EXEMPTION
Petitioners: PAGCOR
Respondents: BIR, Hon. BUNAG
Ponente: PERALTA. J,
FACTS:
• PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A on January 1,
1977. Simultaneous to its creation, P.D. No. 1067-B (supplementing P.D. No. 1067-A) was
issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of
five percent (5%) of the gross revenue.
• Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.
• PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was
later restored by Letter of Instruction No. 1430, which was issued in September 1984.
• On January 1, 1998, R.A. No. 8424, 8 otherwise known as the National Internal Revenue
Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-
owned and controlled corporations (GOCCs) shall pay corporate income tax, except
petitioner PAGCOR, the Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance Corporation, and the Philippine Charity
Sweepstakes Office.
▪ (c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. — The provisions of existing special general laws to the
contrary notwithstanding, all corporations, agencies or instrumentalities
owned and controlled by the Government,except the Government Service
and Insurance Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax upon their taxable income
as are imposed by this Section upon corporations or associations engaged in
similar business, industry, or activity.
• With the enactment of R.A. No. 9337 on May 24, 2005, certain sections of the National
Internal Revenue Code of 1997 were amended. The particular amendment that is at issue
in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National
Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs
that are exempt from payment of corporate income tax
▪ (c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. — The provisions of existing special general laws to the
contrary notwithstanding, all corporations, agencies, or instrumentalities
owned and controlled by the Government,except the Government Service
and Insurance Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), and the Philippine Charity
Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or associations
engaged in similar business, industry, or activity.
ISSUE: W/N PAGCOR is still exempt from corporate income tax and VAT with the enactment
of R.A. No. 9337 – Corp. Income TAX notexempt – VAT exempted
 HELD/RATIO:
• CORPORATE INCOME TAX - not exempt
• Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal
Revenue Code of 1977, petitioner is no longer exempt from corporate income tax as it
has been effectively omitted from the list of GOCCs that are exempt from it.
• A perusal of the legislative records of the Bicameral Conference Meeting of the
Committee on Ways on Means dated October 27, 1997 would show that the exemption
of PAGCOR from the payment of corporate income tax was due to the acquiescence of
the Committee on Ways on Means to the request of PAGCOR that it be exempt from
such tax.
• The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from
paying corporate income tax was not based on a classification showing substantial
distinctions which make for real differences, but to reiterate, the exemption was granted
upon the request of PAGCOR that it be exempt from the payment of corporate income
tax.
• With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has
been excluded from the enumeration of GOCCs that are exempt from paying corporate
income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of
the Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No.
3555, show that it is the legislative intent that PAGCOR be subject to the payment of
corporate income tax
• Taxation is the rule and exemption is the exception. 23 The burden of proof rests upon
the party claiming exemption to prove that it is, in fact, covered by the exemption so
claimed. 24 As a rule, tax exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and supported by clear legal
provision.
• In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate
income tax
• VALUE ADDED TAX - exempt
• the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being
contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be
subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption
from the payment of corporate income tax, which was already addressed above by this
Court.
• Petitioner is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869,
is a special law that grants petitioner exemption from taxes.
• Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No.
9337, which retained Section 108 (B) (3) of R.A. No. 8424
• As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section
108 of R.A. No. 8424 by imposing VAT on other services not previously covered, it did not
amend the portion of Section 108 (B) (3) that subjects to zero percent rate services
performed by VAT-registered persons to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to 0% rate.
• PAGCOR has a blanket exemption to taxes with no distinction on whether the taxes are
direct or indirect.
• the legislature clearly granted exemption also from indirect taxes. It must be noted that
the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer,
transferee, or lessee of the goods, properties, or services subject to VAT.Thus, by
extending the tax exemption to entities or individuals dealing with PAGCOR in casino
operations, it is exempting PAGCOR from being liable to indirect taxes.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,
amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding
petitioner Philippine Amusement and Gaming Corporation from the enumeration of
government-owned and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects
PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue
Code of 1997, as amended by Republic Act No. 9337.
10.DUMAGUETE CATHEDRAL CREDIT COOPERATIVE VS. CIR
GR NO. 182722
JANUARY 22, 2010
By: Atmos
Topic: TAX EXEMPTION
Petitioners: DUMAGUETE CATHEDRAL CREDIT COOPERATIVE
Respondents: CIR
Ponente: Reyes, J.B.L, J
DOCTRINE: Cooperatives, including their members, deserve a preferential tax treatment
because of the vital role they play in the attainment of economic development and social
justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax
must give way to foster the creation and growth of cooperatives. To borrow the words of
Justice Isagani A. Cruz: "The power of taxation, while indispensable, is not absolute and may
be subordinated to the demands of social justice."
FACTS:
Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative with the following
objectives and purposes: (1) to increase the income and purchasing power of the members;
(2) to pool the resources of the members by encouraging savings and promoting thrift to
mobilize capital formation for development activities; and (3) to extend loans to members for
provident and productive purposes.
(BIR) Operations Group Deputy Commissioner, issued Letters of Authority authorizing BIR
Officers to examine petitioner’s books of accounts and other accounting records for all
internal revenue taxes for the taxable years 1999 and 2000.
On 2002, DCCCO received Pre-Assessment Notices for deficiency withholding taxes for
taxable years 1999 and 2000. The deficiency withholding taxes cover the payments of the
honorarium of the Board of Directors, security and janitorial services, legal and professional
fees, and interest on savings and time deposits of its members.
DCCCO informed BIR that it would ONLY pay the deficiency withholding taxes corresponding
to the honorarium of the Board of Directors, security and janitorial services, legal and
professional fees for the year 1999 and 2000, EXCLUDING penalties and interest.
After payment, DCCCO received from the BIR Transcripts of Assessment and Audit
Results/Assessment Notices, ordering petitioner to pay the deficiency withholding taxes,
INCLUSIVE of penalties, for the years 1999 and 2000.
DCCO's contention:
Under Sec. 24. Income Tax Rates. — x x x x (B) Rate of Tax on Certain Passive Income: — (1)
Interests, Royalties, Prizes, and Other Winnings. — A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; x x x applies only to banks and not to cooperatives, since the phrase "similar
arrangements" is preceded by terms referring to banking transactions that have deposit
peculiarities. Therefore, the savings and time deposits of members of cooperatives are not
included in the enumeration, and thus not subject to the 20% final tax. Also, pursuant to
Article XII, Section 15 of the Constitution 25 and Article 2 of Republic Act No. 6938 (RA 6938)
or the Cooperative Code of the Philippines, cooperatives enjoy a preferential tax treatment
which exempts their members from the application of Section 24(B)(1) of the NIRC.
ISSUE: Whether or not DCCCO is liable to pay the deficiency withholding taxes on interest
from savings and time deposits of its members for the taxable years 1999 and 2000, as well
as the delinquency interest of 20% per annum?
RULING: NOPE
DCCCO is not liable. The NIRC states that a "final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other
monetary benefit from the deposit substitutes and from trust funds and similar arrangement
x x x" for individuals under Section 24(B)(1) and for domestic corporations under Section
27(D)(1). Considering the members’ deposits with the cooperatives are not currency bank
deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not
apply to members of cooperatives and to deposits of primaries with federations,
respectively.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to
foster the creation and growth of cooperatives as a practical vehicle for promoting self-
reliance and harnessing people power towards the attainment of economic development and
social justice. Thus, to encourage the formation of cooperatives and to create an atmosphere
conducive to their growth and development, the State extends all forms of assistance to
them, one of which is providing cooperatives a preferential tax treatment.
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles
61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. — Duly registered cooperatives under this Code
which do not transact any business with non-members or the general public shall not be
subject to any government taxes and fees imposed under the Internal Revenue Laws and
other tax laws. Cooperatives not falling under this article shall be governed by the succeeding
section. ART. 62. Tax and Other Exemptions. — Cooperatives transacting business with both
members and nonmembers shall not be subject to tax on their transactions to members.
Notwithstanding the provision of any law or regulation to the contrary, such cooperatives
dealing with nonmembers shall enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that
cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity. 30 Therefore, limiting the
application of the tax exemption to cooperatives would go against the very purpose of a
credit cooperative. Extending the exemption to members of cooperatives, on the other hand,
would be consistent with the intent of the legislature. Thus, although the tax exemption only
mentions cooperatives, this should be construed to include the members.
It is also worthy to note that the tax exemption in RA 6938 was retained in RA 9520. The only
difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938) now expressly states
that transactions of members with the cooperatives are not subject to any taxes and fees.
Thus: ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both
members and non-members shall not be subjected to tax on their transactions with
members. In relation to this, the transactions of members with the cooperative shall not be
subject to any taxes and fees, including but not limited to final taxes on members’ deposits
and documentary tax. Notwithstanding the provisions of any law or regulation to the
contrary, such cooperatives dealing with nonmembers shall enjoy the following tax
exemptions. Moreover, no less than our Constitution guarantees the protection of
cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments
for social justice and economic development. At the same time, Section 10 of Article II of the
Constitution declares that it is a policy of the State to promote social justice in all phases of
national development.
11. CIR v. V.G. Sinco Educational Corp.
GR NO. L-9276
October 23, 1956
SPV
Topic: Tax-Exempt Corporations and Corporations Taxed at Preferential Rates
Petitioners: Collector of Internal Revenue
Respondents: V.G. Sinco Educational Corporation
Ponente: Bautista Angelo
FACTS
- In 1949, Vicente G. Sinco established an educational institution known as
Foundation College of Dumaguete.
- Pursuant to the requirement of the DepEd that all schools and colleges recognized
by the government should be incorporated, the V.G. Sinco Educational Institution
was organized. The college derived, by way of tuition fees, yearly gross profits:
o 1949: P32,684.70
o 1950: P88,341.80
o 1951: P114,499.35
o 1952: P83,259.04
o 1953: P97,907.18
 - Apparently, according to the income tax examiner of the BIR, the college realized a
taxable net income
o 1949: P3K;
o 1950, P17K;
o For the years 1951 to 1953, inclusive, the income tax returns of the
college have not as yet been verified.
o 1951: P26K, and a
o 1952: a loss of P9K
o 1953: P223
- CIR assessed income tax for years 1950-1951 a sum of P5,364, which was paid by
the college.
- Two years after, the college commenced an action for refund alleging that it is
exempt from income tax under Sec. 27(e) of the NIRC, since it is organized and
maintained exclusively for educational purposes, and no part of its net income
inures to the benefit of any private individual.
o CTA decided the case in favor of the college.
- CIR counters that part of the net income inured to the benefit of the president and
founder of the corporation.
o In the yearly statements of the college, the balance sheet provides
liabilities in years 1951, 1952 and 1953 payable to Vicente G. Sinco,
Personal, and Community Publishers (to which Sinco was the biggest
stockholder)
ISSUE: W/N the college is exempt from income tax – YES
HELD:
- Sinco claimed that he never collected his salary and that is the reason why it was
carried in the books as accrued expenses.
- With regard to Community Publishers, the corporation is distinct and separate from
its stockholders.
o These are two different entities and whatever relation there is between
the two is that the former merely extends help to the latter to enable it
to comply with the requirements of the law and to all its needs for
educational purposes.
- It is indeed too sweeping if not unfair to conclude that part of the income of the
institution inured to the benefit of one of its stockholders simply because part of
the income was carried in its books as accumulated salaries of its president and
teacher.
- The college is a non-profit institution and since its organization it has never
distributed any dividend or pro4t to its stockholders.
o Part of its income went to the payment of its teachers or professors and
to the other expenses of the college incident to an educational institution
but none of the income has ever been channeled to the benefit of any
individual stockholder.
o Payment for the renumeration of services is not considered as
distribution of profit as would make the school one conducted for profit.
- Moreover, the tuition fee the college charges is the source of income, and it does
not make the school in itself a profit-making enterprise since every responsible
organization must be so run as to, at least, insure its existence, by operating within
the limits of its own resources, especially its regular income.
o Amount of fees charged depends upon the policy and a given
administration at a particular time.
- Lastly, in acquiring additional buildings and equipment, the income garnered does
not necessarily redound to the benefit of the stockholders since no one can predict
the financial condition of the institution upon its dissolution.
o The fact that the members may receive some benefit on dissolution upon
distribution of the assets is a contingency too remote to have any
material bearing upon the question where the association is admittedly
not a scheme to avoid taxation and its good faith and honesty or purpose
is not challenged
Dispositive
Wherefore, the decision appealed from is aArmed, without pronouncement as to
costs.
12. CALASANZ v. CIR
GR NO. L-26284
October 8, 2986
BDC
Topic: Capital gains
Petitioners: Tomas Calazanz, et al.
Respondents: CIR and CTA
Ponente: FERNAN, J.
FACTS
● Petitioner Ursula Calasanz inherited from her father an agricultural land with
1,678,000 sqm located in Cainta, Rizal.
● In order to liquidate the inheritance, Ursula had the land surveyed and subdivided
into lots. Improvements (roads, gutters, lighting) were introduced to make it
saleable. The lots were later on sold at a profit.
● In their joint income tax return for 1957, petitioners disclosed a profit of P31,060
from the sale of the subdivided lots and reported 50% thereof, or P15,530.36 as
taxable capital gains.
● The Revenue Examiner adjudged petitioners as engaged in real estate business to
which the CIR required them to pay the real estate dealer’s tax (P160.00) and
assessed a deficiency income tax on profits (P3,561.24) derived from the sale of the
lots.
● Petitioners filed with the CTA a petition for review contesting the assessments.
● CTA – Upheld the commissioner except for the compromise penalty of P10 for the
same cannot be collected in the absence of a valid and binding compromise
agreement (kasi yung real estate tax 150 lang talaga may 10 lang na compromise
penalty for late payment, parang si Deinla nagffine hehe)
● Hence, this appeal.
Petitioners contention - inherited land is a capital asset within the meaning of Section 34[a]
[1] of the Tax Code and that an heir who liquidated his inheritance cannot be said to have
engaged in the real estate business and may not be denied the preferential tax treatment
given to gains from sale of capital assets, merely because he disposed of it in the only
possible and advantageous way.
Respondent’s contention - the imposition of the taxes in question is in accordance with law
since petitioners are deemed to be in the real estate business for having been involved in a
series of real estate transactions pursued for profit. Respondent argued that property
acquired by inheritance may be converted from an investment property to a business
property if, as in the present case, it was subdivided, improved, and subsequently sold and
the number, continuity and frequency of the sales were such as to constitute "doing
business."
ISSUE
WON petitioners are liable for capital gains tax
HELD/RATIO
Yes.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and
capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital
assets as follows:
Capital assets. - The term 'capital assets' means property held by the taxpayer
[whether or not connected with his trade or business], but does not include, stock
in trade of the taxpayer or other property of a kind which would properly be
included, in the inventory of the taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in the trade or business
of a character which is subject to the allowance for depreciation provided in
subsection [f] of section thirty; or real property used in the trade or business of the
taxpayer
Thus, if the asset is not among the exceptions, it is a capital asset; conversely, assets falling
within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale
or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset
involved in the transaction. However, property initially classified as a capital asset may
thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to
show that the activity was in furtherance of or in the course of the taxpayer's trade or
business.
There is no rigid rule or fixed formula by which it can be determined with finality whether
property sold by a taxpayer was held primarily for sale to customers in the ordinary course of
his trade or business or whether it was sold as a capital asset.
The activities of petitioners are indistinguishable from those invariably employed by one
engaged in the business of selling real estate.
Petitioners did not sell the land in the condition in which they acquired it. While
the land was originally devoted to rice and fruit trees, it was subdivided into small
lots and in the process converted into a residential subdivision and given the name
Don Mariano Subdivision, in addition to the extensive improvements introduced
therein. There is authority that a property ceases to be a capital asset if the
amount expended to improve it is double its original cost, for the extensive
improvement indicates that the seller held the property primarily for sale to
customers in the ordinary course of his business.
The increase in amount of receivables to P446,407.00 from P395,693.35 signifies
that the lots were sold on installment basis and suggests the number, continuity
and frequency of the sales.
Furthermore, the lots were advertised for sale to the public and that the sales and
collections commissions were paid.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.
13.) TUASON vs. LINGAD
G.R. NO. L-24248 / 31 JUL 1974 / DEINLA
TOPIC: Capital Gains and Losses; Ordinary Assets/Income
PETITIONER: Antonio Tuason, Jr.
RESPONDENT: Jose B. Lingad as CIR
PONENTE: Castro
FACTS:
● In 1948 the petitioner inherited from his mother several tracts of land situated in Manila.
When the petitioner's mother was yet alive she had two parcels subdivided into twenty-
nine lots.
○ Twenty-eight were allocated to their then occupants who had lease contracts with the
petitioner's predecessor at various times from 1900 to 1903.
○ Lot 29 was not leased to any person. It needed filling because of its very low elevation,
and was planted to kangkong and other crops.
● After the petitioner took possession of the mentioned parcels in 1950, he instructed his
attorney-in-fact to sell them. There was no difficulty in selling the 28 small lots as their
respective occupants bought them on a 10-year installment basis. Lot 29 could not
however be sold immediately due to its low elevation.
● Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into
small lots and paved with macadam roads. The small lots were then sold over the years on
a uniform 10-year annual amortization basis.
● In 1953 and 1954 the petitioner reported his income from the sale of the small lots
(P102,050.79 and P103,468.56, respectively) as long-term capital gains.
● The Collector of Internal Revenue upheld the petitioner's treatment of his gains from the
said sale of small lots, against a contrary ruling of a revenue examiner.
● In his 1957 tax return the petitioner as before treated his income from the sale of the small
lots (P119,072.18) as capital gains and included only ½ thereof as taxable income. In this
return, the petitioner deducted the real estate dealer's tax he paid for 1957.
● It was explained, however, that the payment of the dealer's tax was on account of rentals
received from the mentioned 28 lots and other properties of the petitioner. On the basis
 of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved
the petitioner's treatment of his income from the sale of the lots in question.
● In a memorandum to the CIR, the chief of the BIR Assessment Department advanced the
same opinion, which was concurred in by the Commissioner of Internal Revenue.
● However, the Commissioner reversed himself and considered the petitioner's profits from
the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner
received a letter from the Bureau of Internal Revenue advising him to pay deficiency
income tax.
● The petitioner's motion for reconsideration of the foregoing deficiency assessment was
denied, and so he went up to the Court of Tax Appeals, which however rejected his
posture in a decision dated January 16, 1965, and ordered him, in addition, to pay a 5%
Surcharge and 1% monthly interest "pursuant to Sec. 51(e) of the Revenue Code."
ISSUE: Whether the properties in question which the petitioner had inherited and
subsequently sold in small lots to other persons should be regarded as capital assets. YES.
RULING:
● As thus defined by law, the term "capital assets" includes all the properties of a taxpayer
whether or not connected with his trade or business, except:
○ (1) stock in trade or other property included in the taxpayer's inventory;
○ (2) property primarily for sale to customers in the ordinary course of his trade or
business;
○ (3) property used in the trade or business of the taxpayer and subject to depreciation
allowance; and
○ (4) real property used in trade or business.
● If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss
relative thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or
exchange of all other properties of the taxpayer is a capital gain or a capital loss.
● Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a
corporation) from the sale or exchange of capital assets held for more than twelve months,
only 50% of the net capital gain shall be taken into account in computing the net income.
● The Tax Code's provision on so-called long-term capital gains constitutes a statute of
partial exemption. In view of the familiar and settled rule that tax exemptions are
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority,3 the field of application of the term it "capital assets" is necessarily narrow,
while its exclusions must be interpreted broadly.
● When the petitioner obtained by inheritance the parcels in question, what was
transferred to him was not merely the duty to respect the terms of any contract thereon,
but as well the correlative right to receive and enjoy the fruits of the business and property
which the decedent had established and maintained.
● As far back as 1957 the petitioner was receiving rental payments from the mentioned 28
small lots, even if the leases executed by his deceased mother thereon expired in 1953.
The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not
deserve a different characterization for tax purposes.
● The following circumstances in combination show unequivocally that the petitioner was, at
the time material to this case, engaged in the real estate business:
○ (1) the parcels of land involved have in totality a substantially large area, nearly seven
(7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the
said properties are located in the heart of Metropolitan Manila;
○ (2) they were subdivided into small lots and then sold on installment basis (this manner
of selling residential lots is one of the basic earmarks of a real estate business);
○ (3) comparatively valuable improvements were introduced in the subdivided lots for the
unmistakable purpose of not simply liquidating the estate but of making the lots more
saleable to the general public;
○ (4) the employment of petitioner's attorney-in-fact, for the purpose of developing,
managing, administering and selling the lots in question indicates the existence of
owner-realty broker relationship;
○ (5) the sales were made with frequency and continuity, and from these the petitioner
consequently received substantial income periodically;
○ (6) the annual sales volume of the petitioner from the said lots was considerable, e.g.,
P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and
○ (7) the petitioner, by his own tax returns, was not a person who can be indubitably
adjudged as a stranger to the real estate business.
DISPOSITION
ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the portion
thereof that imposes 5% surcharge and 1% monthly interest, which is hereby set aside. No
costs.
14. CHINA BANKING CORPORATION vs CA
by: Shanon / G.R. No. 125508 / July 19, 2000 / Ponente: VITUG, J.
Topic: CAPITAL GAINS and LOSSES: Limitation on Capital Loss
Petitioners: CHINA BANKING CORPORATION (CBC)
Respondents: CA, CIR and CTA
Facts:
● CBC made 53% equity investment in the First CBC Capital (FCC), a Hongkong subsidiary
engaged in financing and investment with "deposit-taking" function.
o Based on records, FCC became insolvent.
● As approved by Banko Sentral, CBC wrote-off as being worthless, its investment in FCC,
in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss
deductible from its gross income.
● CIR disallowed the deduction and assessed CBC for income tax deficiency in the amount
of P8.5M, on the grounds that:
o The investment should not be classified as being "worthless" and,
o Assuming that the securities had indeed become worthless, they should then
be classified as "capital loss," and not as a bad debt expense, there being no
indebtedness to speak of between CBC and its subsidiary.
● CTA sustained CIR, holding that the securities had not indeed become worthless and
ordered CBC to pay its deficiency income tax. CA upheld CTA.
● Hence, this CBC’s petition for review on certiorari.
Issue/Ruling: Whether the loss sustained should be classified as a capital loss, assuming the
equity investment, held by CBC, become worthless. (YES)
● An equity investment is a capital, not ordinary, asset of the investor; the sale or
exchange of which results in either a capital gain or a capital loss.
 o The gain or the loss is ordinary when the property sold or exchanged is not a o Section 34(d)(4)(B): Securities becoming worthless:
capital asset. o Section 40 (A-C): Determination of amount of and recognition of gain or loss.
● A capital asset is defined negatively in Section 39(1) of the NIRC:
o It means property held by the taxpayer (whether connected with his trade or WHEREFORE, the Petition was DENIED…
business),
o But does not include: (1) stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, (2) property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business;
or (3) property used in the trade or business, of a character which is subject to
the allowance for depreciation provided in subsection (f) of section 29; or (4)
real property used in the trade or business of the taxpayer.
● Shares of stock; like the other securities defined in Section 20(t)[4] of the NIRC, would
be ordinary assets only to a dealer in securities or a person engaged in the purchase and
sale of, or an active trader in, securities.
● Section 22(u) of the NIRC defines a dealer in securities:
o It means a merchant of stocks or securities, whether an individual,
corporation, with an established place of business, regularly engaged in the
purchase of securities and their resale to customers; that is, one who as a
merchant buys securities and sells them to customers with a view to the gains
and profits that may be derived.
● In the hands of another who holds the shares of stock by way of an investment, the
shares to him would be capital assets.
● When the shares held by such investor become worthless, the loss is deemed to be a
loss from the sale or exchange of capital assets.
● A capital gain or a capital loss normally requires the concurrence of 2 conditions for it to
result:
o There is a sale or exchange; and
o The thing sold or exchanged is a capital asset.
● When securities become worthless, there is strictly no sale or exchange
o But the law deems the loss anyway to be "a loss from the sale or exchange of
capital assets.
● Capital losses are allowed to be deducted, only to the extent of capital gains.
o i.e., Gains derived from the sale or exchange of capital assets, and not from
any other income of the taxpayer.
● In this case, First CBC Capital was a subsidiary corporation of CBC, whose shares in said
investee corporation are not intended for purchase or sale but as an investment.
o Any loss would be a capital loss, not ordinary loss, to the investor.
● Summary of the case:
o The equity investment in shares of stock held by CBC of approximately 53% in
its Hongkong subsidiary, the First CBC Capital, is not an indebtedness, and it is
a capital, not an ordinary, asset.
o Assuming that the equity investment of CBC has indeed become "worthless,"
the loss sustained is a capital loss, not an ordinary, loss.
o The capital loss sustained by CBC can only be deducted from capital gains, if
any, derived by it during the same taxable year that the securities have
become "worthless."
● Other important provisions cited in the case. Please Read:
o Section 39 (C): Limitations on Capital Losses